U.C.C. - ARTICLE 5 - LETTERS
OF CREDIT
(REVISED 1995)
Copyright 1978, 1987, 1988, 1990, 1991, 1992, 1995,
1998, 2001 by The American Law Institute and the
National Conference of Commissioners on Uniform State
Laws; reproduced, published and distributed with the
permission of the Permanent Editorial Board for the
Uniform Commercial Code for the limited purposes of
study, teaching, and academic research.
Published by the Legal Information Institute, Cornell Law
School, March 2004. For the version of this article (and
other uniform laws) adopted by a particular state visit the
LII's Uniform Commercial Code Locator page at:
http://www.law.cornell.edu/uniform/ucc.html
Decisions and related materials in the commercial law field
generally are available at:
http://www.law.cornell.edu/topics/commercial.html
§ 5-101. Short Title.
This Article shall be known and may be cited as Uniform Commercial Code-Letters of
Credit.
[Comment]
§ 5-102. Definitions.
(a) In this article:
(1) "Adviser" means a person who, at the request of the issuer, a confirmer, or
another adviser, notifies or requests another adviser to notify the beneficiary that
a letter of credit has been issued, confirmed, or amended.
(2) "Applicant" means a person at whose request or for whose account a letter
of credit is issued. The term includes a person who requests an issuer to issue a
letter of credit on behalf of another if the person making the request undertakes
an obligation to reimburse the issuer.
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(3) "Beneficiary" means a person who under the terms of a letter of credit is
entitled to have its complying presentation honored. The term includes a person
to whom drawing rights have been transferred under a transferable letter of
credit.
(4) "Confirmer" means a nominated person who undertakes, at the request or
with the consent of the issuer, to honor a presentation under a letter of credit
issued by another.
(5) "Dishonor" of a letter of credit means failure timely to honor or to take an
interim action, such as acceptance of a draft, that may be required by the letter
of credit.
(6) "Document" means a draft or other demand, document of title, investment
security, certificate, invoice, or other record, statement, or representation of fact,
law, right, or opinion (i) which is presented in a written or other medium
permitted by the letter of credit or, unless prohibited by the letter of credit, by
the standard practice referred to in Section 5-108(e) and (ii) which is capable of
being examined for compliance with the terms and conditions of the letter of
credit. A document may not be oral.
(7) "Good faith" means honesty in fact in the conduct or transaction concerned.
(8) "Honor" of a letter of credit means performance of the issuer's undertaking
in the letter of credit to pay or deliver an item of value. Unless the letter of
credit otherwise provides, "honor" occurs (i) upon payment,(ii) if the letter of
credit provides for acceptance, upon acceptance of a draft and, at maturity, its
payment, or(iii) if the letter of credit provides for incurring a deferred obligation,
upon incurring the obligation and, at maturity, its performance.
(9) "Issuer" means a bank or other person that issues a letter of credit, but
does not include an individual who makes an engagement for personal, family, or
household purposes.
(10) "Letter of credit" means a definite undertaking that satisfies the
requirements of Section 5-104 by an issuer to a beneficiary at the request or for
the account of an applicant or, in the case of a financial institution, to itself or for
its own account, to honor a documentary presentation by payment or delivery of
an item of value.
(11) "Nominated person" means a person whom the issuer (i) designates or
authorizes to pay, accept, negotiate, or otherwise give value under a letter of
credit and (ii) undertakes by agreement or custom and practice to reimburse.
(12) "Presentation" means delivery of a document to an issuer or nominated
person for honor or giving of value under a letter of credit.
(13) "Presenter" means a person making a presentation as or on behalf of a
beneficiary or nominated person.
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(14) "Record" means information that is inscribed on a tangible medium, or that
is stored in an electronic or other medium and is retrievable in perceivable form.
(15) "Successor of a beneficiary" means a person who succeeds to
substantially all of the rights of a beneficiary by operation of law, including a
corporation with or into which the beneficiary has been merged or consolidated,
an administrator, executor, personal representative, trustee in bankruptcy,
debtor in possession, liquidator, and receiver.
(b) Definitions in other Articles applying to this article and the sections in which they
appear are:
"Accept" or "Acceptance" Section 3-409
"Value" Sections 3-303, 4-211
(c) Article 1 contains certain additional general definitions and principles of
construction and interpretation applicable throughout this article.
[Comment]
§ 5-103. Scope.
(a) This article applies to letters of credit and to certain rights and obligations
arising out of transactions involving letters of credit.
(b) The statement of a rule in this article does not by itself require, imply, or negate
application of the same or a different rule to a situation not provided for, or to a
person not specified, in this article.
(c) With the exception of this subsection, subsections (a) and (d), Sections 5102(a)(9)
and (10), 5-106(d), and 5-114(d), and except to the extent prohibited in
Sections 1-302 and 5-117(d), the effect of this article may be varied by agreement
or by a provision stated or incorporated by reference in an undertaking. A term in
an agreement or undertaking generally excusing liability or generally limiting
remedies for failure to perform obligations is not sufficient to vary obligations
prescribed by this article.
(d) Rights and obligations of an issuer to a beneficiary or a nominated person under
a letter of credit are independent of the existence, performance, or nonperformance
of a contract or arrangement out of which the letter of credit arises or which
underlies it, including contracts or arrangements between the issuer and the
applicant and between the applicant and the beneficiary.
[Comment]
§ 5-104. Formal Requirements.
A letter of credit, confirmation, advice, transfer, amendment, or cancellation may be
issued in any form that is a record and is authenticated (i) by a signature or (ii) in
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accordance with the agreement of the parties or the standard practice referred to in
Section 5-108(e).
[Comment]
§ 5-105. Consideration.
Consideration is not required to issue, amend, transfer, or cancel a letter of credit,
advice, or confirmation.
[Comment]
§ 5-106. Issuance, Amendment, Cancellation, and Duration.
(a) A letter of credit is issued and becomes enforceable according to its terms
against the issuer when the issuer sends or otherwise transmits it to the person
requested to advise or to the beneficiary. A letter of credit is revocable only if it so
provides.
(b) After a letter of credit is issued, rights and obligations of a beneficiary, applicant,
confirmer, and issuer are not affected by an amendment or cancellation to which that
person has not consented except to the extent the letter of credit provides that it is
revocable or that the issuer may amend or cancel the letter of credit without that
consent.
(c) If there is no stated expiration date or other provision that determines its
duration, a letter of credit expires one year after its stated date of issuance or, if
none is stated, after the date on which it is issued.
(d) A letter of credit that states that it is perpetual expires five years after its stated
date of issuance, or if none is stated, after the date on which it is issued.
[Comment]
§ 5-107. Confirmer, Nominated Person, and Adviser.
(a) A confirmer is directly obligated on a letter of credit and has the rights and
obligations of an issuer to the extent of its confirmation. The confirmer also has
rights against and obligations to the issuer as if the issuer were an applicant and the
confirmer had issued the letter of credit at the request and for the account of the
issuer.
(b) A nominated person who is not a confirmer is not obligated to honor or
otherwise give value for a presentation.
(c) A person requested to advise may decline to act as an adviser. An adviser that
is not a confirmer is not obligated to honor or give value for a presentation. An
adviser undertakes to the issuer and to the beneficiary accurately to advise the
terms of the letter of credit, confirmation, amendment, or advice received by that
person and undertakes to the beneficiary to check the apparent authenticity of the
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request to advise. Even if the advice is inaccurate, the letter of credit, confirmation,
or amendment is enforceable as issued.
(d) A person who notifies a transferee beneficiary of the terms of a letter of credit,
confirmation, amendment, or advice has the rights and obligations of an adviser
under subsection (c). The terms in the notice to the transferee beneficiary may
differ from the terms in any notice to the transferor beneficiary to the extent
permitted by the letter of credit, confirmation, amendment, or advice received by the
person who so notifies.
[Comment]
§ 5-108. Issuer's Rights and Obligations
(a) Except as otherwise provided in Section 5-109, an issuer shall honor a
presentation that, as determined by the standard practice referred to in subsection
(e), appears on its face strictly to comply with the terms and conditions of the letter
of credit. Except as otherwise provided in Section 5-113 and unless otherwise
agreed with the applicant, an issuer shall dishonor a presentation that does not
appear so to comply.
(b) An issuer has a reasonable time after presentation, but not beyond the end of
the seventh business day of the issuer after the day of its receipt of documents:
(1) to honor,
(2) if the letter of credit provides for honor to be completed more than seven
business days after presentation, to accept a draft or incur a deferred obligation,
or
(3) to give notice to the presenter of discrepancies in the presentation.
(c) Except as otherwise provided in subsection (d), an issuer is precluded from
asserting as a basis for dishonor any discrepancy if timely notice is not given, or any
discrepancy not stated in the notice if timely notice is given.
(d) Failure to give the notice specified in subsection (b) or to mention fraud, forgery,
or expiration in the notice does not preclude the issuer from asserting as a basis for
dishonor fraud or forgery as described in Section 5-109(a) or expiration of the letter
of credit before presentation.
(e) An issuer shall observe standard practice of financial institutions that regularly
issue letters of credit. Determination of the issuer's observance of the standard
practice is a matter of interpretation for the court. The court shall offer the parties a
reasonable opportunity to present evidence of the standard practice.
(f) An issuer is not responsible for:
(1) the performance or nonperformance of the underlying contract, arrangement,
or transaction,
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(2) an act or omission of others, or
(3) observance or knowledge of the usage of a particular trade other than the
standard practice referred to in subsection (e).
(g) If an undertaking constituting a letter of credit under Section 5-102(a)(10)
contains nondocumentary conditions, an issuer shall disregard the nondocumentary
conditions and treat them as if they were not stated.
(h) An issuer that has dishonored a presentation shall return the documents or hold
them at the disposal of, and send advice to that effect to, the presenter.
(i) An issuer that has honored a presentation as permitted or required by this
article:
(1) is entitled to be reimbursed by the applicant in immediately available funds
not later than the date of its payment of funds;
(2) takes the documents free of claims of the beneficiary or presenter;
(3) is precluded from asserting a right of recourse on a draft under Sections 3414
and 3-415;
(4) except as otherwise provided in Sections 5-110 and 5-117, is precluded from
restitution of money paid or other value given by mistake to the extent the
mistake concerns discrepancies in the documents or tender which are apparent
on the face of the presentation; and
(5) is discharged to the extent of its performance under the letter of credit unless
the issuer honored a presentation in which a required signature of a beneficiary
was forged.
[Comment]
§ 5-109. Fraud and Forgery.
(a) If a presentation is made that appears on its face strictly to comply with the
terms and conditions of the letter of credit, but a required document is forged or
materially fraudulent, or honor of the presentation would facilitate a material fraud
by the beneficiary on the issuer or applicant:
(1) the issuer shall honor the presentation, if honor is demanded by (i) a
nominated person who has given value in good faith and without notice of
forgery or material fraud, (ii) a confirmer who has honored its confirmation in
good faith, (iii) a holder in due course of a draft drawn under the letter of credit
which was taken after acceptance by the issuer or nominated person, or (iv) an
assignee of the issuer's or nominated person's deferred obligation that was taken
for value and without notice of forgery or material fraud after the obligation was
incurred by the issuer or nominated person; and
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(2) the issuer, acting in good faith, may honor or dishonor the presentation in
any other case.
(b) If an applicant claims that a required document is forged or materially fraudulent
or that honor of the presentation would facilitate a material fraud by the beneficiary
on the issuer or applicant, a court of competent jurisdiction may temporarily or
permanently enjoin the issuer from honoring a presentation or grant similar relief
against the issuer or other persons only if the court finds that:
(1) the relief is not prohibited under the law applicable to an accepted draft or
deferred obligation incurred by the issuer;
(2) a beneficiary, issuer, or nominated person who may be adversely affected is
adequately protected against loss that it may suffer because the relief is granted;
(3) all of the conditions to entitle a person to the relief under the law of this State
have been met; and
(4) on the basis of the information submitted to the court, the applicant is more
likely than not to succeed under its claim of forgery or material fraud and the
person demanding honor does not qualify for protection under subsection (a)(1).
[Comment]
§ 5-110. Warranties.
(a) If its presentation is honored, the beneficiary warrants:
(1) to the issuer, any other person to whom presentation is made, and the
applicant that there is no fraud or forgery of the kind described in Section 5109(a);
and
(2) to the applicant that the drawing does not violate any agreement between
the applicant and beneficiary or any other agreement intended by them to be
augmented by the letter of credit.
(b) The warranties in subsection (a) are in addition to warranties arising under
Article 3, 4, 7, and 8 because of the presentation or transfer of documents covered
by any of those articles.
[Comment]
§ 5-111. Remedies.
(a) If an issuer wrongfully dishonors or repudiates its obligation to pay money under
a letter of credit before presentation, the beneficiary, successor, or nominated
person presenting on its own behalf may recover from the issuer the amount that is
the subject of the dishonor or repudiation. If the issuer's obligation under the letter
of credit is not for the payment of money, the claimant may obtain specific
performance or, at the claimanťs election, recover an amount equal to the value of
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performance from the issuer. In either case, the claimant may also recover
incidental but not consequential damages. The claimant is not obligated to take
action to avoid damages that might be due from the issuer under this subsection. If,
although not obligated to do so, the claimant avoids damages, the claimanťs
recovery from the issuer must be reduced by the amount of damages avoided. The
issuer has the burden of proving the amount of damages avoided. In the case of
repudiation the claimant need not present any document.
(b) If an issuer wrongfully dishonors a draft or demand presented under a letter of
credit or honors a draft or demand in breach of its obligation to the applicant, the
applicant may recover damages resulting from the breach, including incidental but
not consequential damages, less any amount saved as a result of the breach.
(c) If an adviser or nominated person other than a confirmer breaches an obligation
under this article or an issuer breaches an obligation not covered in subsection (a) or
(b), a person to whom the obligation is owed may recover damages resulting from
the breach, including incidental but not consequential damages, less any amount
saved as a result of the breach. To the extent of the confirmation, a confirmer has
the liability of an issuer specified in this subsection and subsections (a) and (b).
(d) An issuer, nominated person, or adviser who is found liable under subsection
(a), (b), or (c) shall pay interest on the amount owed thereunder from the date of
wrongful dishonor or other appropriate date.
(e) Reasonable attorney's fees and other expenses of litigation must be awarded to
the prevailing party in an action in which a remedy is sought under this article.
(f) Damages that would otherwise be payable by a party for breach of an obligation
under this article may be liquidated by agreement or undertaking, but only in an
amount or by a formula that is reasonable in light of the harm anticipated.
[Comment]
§ 5-112. Transfer of Letter of Credit.
(a) Except as otherwise provided in Section 5-113, unless a letter of credit provides
that it is transferable, the right of a beneficiary to draw or otherwise demand
performance under a letter of credit may not be transferred.
(b) Even if a letter of credit provides that it is transferable, the issuer may refuse to
recognize or carry out a transfer if:
(1) the transfer would violate applicable law; or
(2) the transferor or transferee has failed to comply with any requirement stated
in the letter of credit or any other requirement relating to transfer imposed by
the issuer which is within the standard practice referred to in Section 5-108(e) or
is otherwise reasonable under the circumstances.
[Comment]
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§ 5-113. Transfer by Operation of Law.
(a) A successor of a beneficiary may consent to amendments, sign and present
documents, and receive payment or other items of value in the name of the
beneficiary without disclosing its status as a successor.
(b) A successor of a beneficiary may consent to amendments, sign and present
documents, and receive payment or other items of value in its own name as the
disclosed successor of the beneficiary. Except as otherwise provided in subsection
(e), an issuer shall recognize a disclosed successor of a beneficiary as beneficiary in
full substitution for its predecessor upon compliance with the requirements for
recognition by the issuer of a transfer of drawing rights by operation of law under the
standard practice referred to in Section 5-108(e) or, in the absence of such a
practice, compliance with other reasonable procedures sufficient to protect the
issuer.
(c) An issuer is not obliged to determine whether a purported successor is a
successor of a beneficiary or whether the signature of a purported successor is
genuine or authorized.
(d) Honor of a purported successor's apparently complying presentation under
subsection (a) or (b) has the consequences specified in Section 5-108(i) even if the
purported successor is not the successor of a beneficiary. Documents signed in the
name of the beneficiary or of a disclosed successor by a person who is neither the
beneficiary nor the successor of the beneficiary are forged documents for the
purposes of Section 5-109.
(e) An issuer whose rights of reimbursement are not covered by subsection (d) or
substantially similar law and any confirmer or nominated person may decline to
recognize a presentation under subsection (b).
(f) A beneficiary whose name is changed after the issuance of a letter of credit has
the same rights and obligations as a successor of a beneficiary under this section.
[Comment]
§ 5-114. Assignment of Proceeds.
(a) In this section, "proceeds of a letter of credit" means the cash, check, accepted
draft, or other item of value paid or delivered upon honor or giving of value by the
issuer or any nominated person under the letter of credit. The term does not include
a beneficiary's drawing rights or documents presented by the beneficiary.
(b) A beneficiary may assign its right to part or all of the proceeds of a letter of
credit. The beneficiary may do so before presentation as a present assignment of its
right to receive proceeds contingent upon its compliance with the terms and
conditions of the letter of credit.
(c) An issuer or nominated person need not recognize an assignment of proceeds of
a letter of credit until it consents to the assignment.
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(d) An issuer or nominated person has no obligation to give or withhold its consent
to an assignment of proceeds of a letter of credit, but consent may not be
unreasonably withheld if the assignee possesses and exhibits the letter of credit and
presentation of the letter of credit is a condition to honor.
(e) Rights of a transferee beneficiary or nominated person are independent of the
beneficiary's assignment of the proceeds of a letter of credit and are superior to the
assignee's right to the proceeds.
(f) Neither the rights recognized by this section between an assignee and an issuer,
transferee beneficiary, or nominated person nor the issuer's or nominated person's
payment of proceeds to an assignee or a third person affect the rights between the
assignee and any person other than the issuer, transferee beneficiary, or nominated
person. The mode of creating and perfecting a security interest in or granting an
assignment of a beneficiary's rights to proceeds is governed by Article 9 or other
law. Against persons other than the issuer, transferee beneficiary, or nominated
person, the rights and obligations arising upon the creation of a security interest or
other assignment of a beneficiary's right to proceeds and its perfection are governed
by Article 9 or other law.
[Comment]
§ 5-115. Statute of Limitations.
An action to enforce a right or obligation arising under this article must be
commenced within one year after the expiration date of the relevant letter of credit
or one year after the [claim for relief] [cause of action] accrues, whichever occurs
later. A [claim for relief] [cause of action] accrues when the breach occurs,
regardless of the aggrieved party's lack of knowledge of the breach.
[Comment]
§ 5-116. Choice of Law and Forum.
(a) The liability of an issuer, nominated person, or adviser for action or omission is
governed by the law of the jurisdiction chosen by an agreement in the form of a
record signed or otherwise authenticated by the affected parties in the manner
provided in Section 5-104 or by a provision in the person's letter of credit,
confirmation, or other undertaking. The jurisdiction whose law is chosen need not
bear any relation to the transaction.
(b) Unless subsection (a) applies, the liability of an issuer, nominated person, or
adviser for action or omission is governed by the law of the jurisdiction in which the
person is located. The person is considered to be located at the address indicated in
the person's undertaking. If more than one address is indicated, the person is
considered to be located at the address from which the person's undertaking was
issued. For the purpose of jurisdiction, choice of law, and recognition of interbranch
letters of credit, but not enforcement of a judgment, all branches of a bank are
considered separate juridical entities and a bank is considered to be located at the
place where its relevant branch is considered to be located under this subsection.
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(c) Except as otherwise provided in this subsection, the liability of an issuer,
nominated person, or adviser is governed by any rules of custom or practice, such as
the Uniform Customs and Practice for Documentary Credits, to which the letter of
credit, confirmation, or other undertaking is expressly made subject. If (i) this
article would govern the liability of an issuer, nominated person, or adviser under
subsection (a) or (b), (ii) the relevant undertaking incorporates rules of custom or
practice, and (iii) there is conflict between this article and those rules as applied to
that undertaking, those rules govern except to the extent of any conflict with the
nonvariable provisions specified in Section 5-103(c).
(d) If there is conflict between this article and Article 3, 4, 4A, or 9, this article
governs.
(e) The forum for settling disputes arising out of an undertaking within this article
may be chosen in the manner and with the binding effect that governing law may be
chosen in accordance with subsection (a).
[Comment]
§ 5-117. Subrogation of Issuer, Applicant, and Nominated
Person.
(a) An issuer that honors a beneficiary's presentation is subrogated to the rights of
the beneficiary to the same extent as if the issuer were a secondary obligor of the
underlying obligation owed to the beneficiary and of the applicant to the same extent
as if the issuer were the secondary obligor of the underlying obligation owed to the
applicant.
(b) An applicant that reimburses an issuer is subrogated to the rights of the issuer
against any beneficiary, presenter, or nominated person to the same extent as if the
applicant were the secondary obligor of the obligations owed to the issuer and has
the rights of subrogation of the issuer to the rights of the beneficiary stated in
subsection (a).
(c) A nominated person who pays or gives value against a draft or demand
presented under a letter of credit is subrogated to the rights of:
(1) the issuer against the applicant to the same extent as if the nominated
person were a secondary obligor of the obligation owed to the issuer by the
applicant;
(2) the beneficiary to the same extent as if the nominated person were a
secondary obligor of the underlying obligation owed to the beneficiary; and
(3) the applicant to same extent as if the nominated person were a secondary
obligor of the underlying obligation owed to the applicant.
(d) Notwithstanding any agreement or term to the contrary, the rights of
subrogation stated in subsections (a) and (b) do not arise until the issuer honors the
letter of credit or otherwise pays and the rights in subsection (c) do not arise until
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the nominated person pays or otherwise gives value. Until then, the issuer,
nominated person, and the applicant do not derive under this section present or
prospective rights forming the basis of a claim, defense, or excuse.
[Comment]
§ 5-118. Security Interest of Issuer or Nominated Person.
(a) An issuer or nominated person has a security interest in a document presented
under a letter of credit and any identifiable proceeds of the collateral to the extent
that the issuer or nominated person honors or gives value for the presentation.
(b) Subject to subsection (c), as long as and to the extent that an issuer or
nominated person has not been reimbursed or has not otherwise recovered the value
given with respect to a security interest in a document under subsection (a), the
security interest continues and is subject to Article 9, but:
(1) a security agreement is not necessary to make the security interest
enforceable under Section 9-203(b)(3);
(2) if the document is presented in a medium other than a written or other
tangible medium, the security interest is perfected; and
(3) if the document is presented in a written or other tangible medium and is not
a certificated security, chattel paper, a document of title, an instrument, or a
letter of credit, so long as the debtor does not have possession of the document,
the security interest is perfected and has priority over a conflicting security
interest in the document.
TRANSITION PROVISIONS
SECTION [ ]. EFFECTIVE DATE.
This [Act] shall become effective on _______________, 199___.
SECTION [ ]. REPEAL.
This [Act] [repeals] [amends] [insert citation to existing Article 5].
SECTION [ ]. APPLICABILITY.
This [Act] applies to a letter of credit that is issued on or after the effective date of
this [Act]. This [Act] does not apply to a transaction, event, obligation, or duty
arising out of or associated with a letter of credit that was issued before the effective
date of this [Act].
SECTION [ ]. SAVINGS CLAUSE.
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A transaction arising out of or associated with a letter of credit that was issued
before the effective date of this [Act] and the rights, obligations, and interests
flowing from that transaction are governed by any statute or other law amended or
repealed by this [Act] as if repeal or amendment had not occurred and may be
terminated, completed, consummated, or enforced under that statute or other law.
OFFICIAL COMMENTS ARTICLE
5
Official Comment § 5-101.
The Official Comment to the original Section 5-101 was a remarkably brief
inaugural address. Noting that letters of credit had not been the subject of
statutory enactment and that the law concerning them had been developed in the
cases, the Comment stated that Article 5 was intended "within its limited scope"
to set an independent theoretical frame for the further development of letters of
credit. That statement addressed accurately conditions as they existed when the
statement was made, nearly half a century ago. Since Article 5 was originally
drafted, the use of letters of credit has expanded and developed, and the case
law concerning these developments is, in some respects, discordant.
Revision of Article 5 therefore has required reappraisal both of the statutory goals
and of the extent to which particular statutory provisions further or adversely
affect achievement of those goals.
The statutory goal of Article 5 was originally stated to be: (1) to set a substantive
theoretical frame that describes the function and legal nature of letters of credit;
and (2) to preserve procedural flexibility in order to accommodate further
development of the efficient use of letters of credit. A letter of credit is an
idiosyncratic form of undertaking that supports performance of an obligation
incurred in a separate financial, mercantile, or other transaction or arrangement.
The objectives of the original and revised Article 5 are best achieved (1) by
defining the peculiar characteristics of a letter of credit that distinguish it and the
legal consequences of its use from other forms of assurance such as secondary
guarantees, performance bonds, and insurance policies, and from ordinary
contracts, fiduciary engagements, and escrow arrangements; and (2) by
preserving flexibility through variation by agreement in order to respond to and
accommodate developments in custom and usage that are not inconsistent with
the essential definitions and substantive mandates of the statute. No statute
can, however, prescribe the manner in which such substantive rights and duties
are to be enforced or imposed without risking stultification of wholesome
developments in the letter of credit mechanism. Letter of credit law should
remain responsive to commercial reality and in particular to the customs and
expectations of the international banking and mercantile community. Courts
should read the terms of this article in a manner consistent with these customs
and expectations.
The subject matter in Article 5, letters of credit, may also be governed by an
international convention that is now being drafted by UNCITRAL, the draft
Convention on Independent Guarantees and Standby Letters of Credit. The
Uniform Customs and Practice is an international body of trade practice that is
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commonly adopted by international and domestic letters of credit and as such is
the "law of the transaction" by agreement of the parties. Article 5 is consistent
with and was influenced by the rules in the existing version of the UCP. In
addition to the UCP and the international convention, other bodies of law apply to
letters of credit. For example, the federal bankruptcy law applies to letters of
credit with respect to applicants and beneficiaries that are in bankruptcy;
regulations of the Federal Reserve Board and the Comptroller of the Currency lay
out requirements for banks that issue letters of credit and describe how letters of
credit are to be treated for calculating asset risk and for the purpose of loan
limitations. In addition there is an array of anti-boycott and other similar laws
that may affect the issuance and performance of letters of credit. All of these
laws are beyond the scope of Article 5, but in certain circumstances they will
override Article 5.
Official Comment § 5-102.
1. Since no one can be a confirmer unless that person is a nominated person as
defined in Section 5-102(a)(11), those who agree to "confirm" without the
designation or authorization of the issuer are not confirmers under Article 5.
Nonetheless, the undertakings to the beneficiary of such persons may be
enforceable by the beneficiary as letters of credit issued by the "confirmer" for its
own account or as guarantees or contracts outside of Article 5.
2. The definition of "document" contemplates and facilitates the growing
recognition of electronic and other nonpaper media as "documents," however, for
the time being, data in those media constitute documents only in certain
circumstances. For example, a facsimile received by an issuer would be a
document only if the letter of credit explicitly permitted it, if the standard practice
authorized it and the letter did not prohibit it, or the agreement of the issuer and
beneficiary permitted it. The fact that data transmitted in a nonpaper
(unwritten) medium can be recorded on paper by a recipienťs computer printer,
facsimile machine, or the like does not under current practice render the data so
transmitted a "document." A facsimile or S.W.I.F.T. message received directly by
the issuer is in an electronic medium when it crosses the boundary of the issuer's
place of business. One wishing to make a presentation by facsimile (an
electronic medium) will have to procure the explicit agreement of the issuer
(assuming that the standard practice does not authorize it). Article 5
contemplates that electronic documents may be presented under a letter of credit
and the provisions of this Article should be read to apply to electronic documents
as well as tangible documents. An electronic document of title is delivered
through the voluntary transfer of control. Article 1, Section 1-201 (definition of
"delivery"). See Article 7, Section 7-106 on control of an electronic document.
Where electronic transmissions are authorized neither by the letter of credit nor
by the practice, the beneficiary may transmit the data electronically to its agent
who may be able to put it in written form and make a conforming presentation.
Cf. Article 7, Section 7-105 on reissuing an electronic document in a tangible
medium.
3. "Good faith" continues in revised Article 5 to be defined as "honesty in fact."
"Observance of reasonable standards of fair dealing" has not been added to the
definition. The narrower definition of "honesty in fact" reinforces the
"independence principle" in the treatment of "fraud," "strict compliance,"
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"preclusion," and other tests affecting the performance of obligations that are
unique to letters of credit. This narrower definition which does not include "fair
dealing" is appropriate to the decision to honor or dishonor a presentation of
documents specified in a letter of credit. The narrower definition is also
appropriate for other parts of revised Article 5 where greater certainty of
obligations is necessary and is consistent with the goals of speed and low cost. It
is important that U.S. letters of credit have continuing vitality and
competitiveness in international transactions.
For example, it would be inconsistent with the "independence" principle if any of
the following occurred: (i) the beneficiary's failure to adhere to the standard of
"fair dealing" in the underlying transaction or otherwise in presenting documents
were to provide applicants and issuers with an "unfairness" defense to dishonor
even when the documents complied with the terms of the letter of credit; (ii) the
issuer's obligation to honor in "strict compliance in accordance with standard
practice" were changed to "reasonable compliance" by use of the "fair dealing"
standard, or (iii) the preclusion against the issuer (Section 5-108(d)) were
modified under the "fair dealing" standard to enable the issuer later to raise
additional deficiencies in the presentation. The rights and obligations arising
from presentation, honor, dishonor and reimbursement, are independent and
strict, and thus "honesty in fact" is an appropriate standard.
The contract between the applicant and beneficiary is not governed by Article 5,
but by applicable contract law, such as Article 2 or the general law of contracts.
"Good faith" in that contract is defined by other law, such as Section 2-103(1)(b)
or Restatement of Contracts 2d, § 205, which incorporate the principle of "fair
dealing" in most cases, or a State's common law or other statutory provisions
that may apply to that contract.
The contract between the applicant and the issuer (sometimes called the
"reimbursement" agreement) is governed in part by this article (e.g., Sections 5108(i),
5-111(b), and 5-103(c)) and partly by other law (e.g., the general law of
contracts). The definition of good faith in Section 5-102(a)(7) applies only to the
extent that the reimbursement contract is governed by provisions in this article;
for other purposes good faith is defined by other law.
4. Payment and acceptance are familiar modes of honor. A third mode of honor,
incurring an unconditional obligation, has legal effects similar to an acceptance of
a time draft but does not technically constitute an acceptance. The practice of
making letters of credit available by "deferred payment undertaking" as now
provided in UCP 500 has grown up in other countries and spread to the United
States. The definition of "honor" will accommodate that practice.
5. The exclusion of consumers from the definition of "issuer" is to keep creditors
from using a letter of credit in consumer transactions in which the consumer
might be made the issuer and the creditor would be the beneficiary. If that
transaction were recognized under Article 5, the effect would be to leave the
consumer without defenses against the creditor. That outcome would violate the
policy behind the Federal Trade Commission Rule in 16 CFR Part 433. In a
consumer transaction, an individual cannot be an issuer where that person would
otherwise be either the principal debtor or a guarantor.
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6. The label on a document is not conclusive; certain documents labelled
"guarantees" in accordance with European (and occasionally, American) practice
are letters of credit. On the other hand, even documents that are labelled "letter
of credit" may not constitute letters of credit under the definition in Section 5102(a).
When a document labelled a letter of credit requires the issuer to pay
not upon the presentation of documents, but upon the determination of an
extrinsic fact such as applicanťs failure to perform a construction contract, and
where that condition appears on its face to be fundamental and would, if ignored,
leave no obligation to the issuer under the document labelled letter of credit, the
issuer's undertaking is not a letter of credit. It is probably some form of
suretyship or other contractual arrangement and may be enforceable as such.
See Sections 5-102(a)(10) and 5-103(d). Therefore, undertakings whose
fundamental term requires an issuer to look beyond documents and beyond
conventional reference to the clock, calendar, and practices concerning the form
of various documents are not governed by Article 5. Although Section 5-108(g)
recognizes that certain nondocumentary conditions can be included in a letter of
credit without denying the undertaking the status of letter of credit, that section
does not apply to cases where the nondocumentary condition is fundamental to
the issuer's obligation. The rules in Sections 5-102(a)(10), 5-103(d), and 5108(g)
approve the conclusion in Wichita Eagle & Beacon Publishing Co. v. Pacific
Nat. Bank, 493 F.2d 1285 (9th Cir. 1974).
The adjective "definite" is taken from the UCP. It approves cases that deny letter
of credit status to documents that are unduly vague or incomplete. See, e.g.,
Transparent Products Corp. v. Paysaver Credit Union, 864 F.2d 60 (7th Cir.
1988). Note, however, that no particular phrase or label is necessary to establish
a letter of credit. It is sufficient if the undertaking of the issuer shows that it is
intended to be a letter of credit. In most cases the parties' intention will be
indicated by a label on the undertaking itself indicating that it is a "letter of
credit," but no such language is necessary.
A financial institution may be both the issuer and the applicant or the issuer and
the beneficiary. Such letters are sometimes issued by a bank in support of the
bank's own lease obligations or on behalf of one of its divisions as an applicant or
to one of its divisions as beneficiary, such as an overseas branch. Because wide
use of letters of credit in which the issuer and the applicant or the issuer and the
beneficiary are the same would endanger the unique status of letters of credit,
only financial institutions are authorized to issue them.
In almost all cases the ultimate performance of the issuer under a letter of credit
is the payment of money. In rare cases the issuer's obligation is to deliver stock
certificates or the like. The definition of letter of credit in Section 5-102(a)(10)
contemplates those cases.
7. Under the UCP any bank is a nominated bank where the letter of credit is
"freely negotiable." A letter of credit might also nominate by the following: "We
hereby engage with the drawer, indorsers, and bona fide holders of drafts drawn
under and in compliance with the terms of this credit that the same will be duly
honored on due presentation" or "available with any bank by negotiation." A
restricted negotiation credit might be "available with x bank by negotiation" or
the like.
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Several legal consequences may attach to the status of nominated person. First,
when the issuer nominates a person, it is authorizing that person to pay or give
value and is authorizing the beneficiary to make presentation to that person.
Unless the letter of credit provides otherwise, the beneficiary need not present
the documents to the issuer before the letter of credit expires; it need only
present those documents to the nominated person. Secondly, a nominated
person that gives value in good faith has a right to payment from the issuer
despite fraud. Section 5-109(a)(1).
8. A "record" must be in or capable of being converted to a perceivable form.
For example, an electronic message recorded in a computer memory that could
be printed from that memory could constitute a record. Similarly, a tape
recording of an oral conversation could be a record.
9. Absent a specific agreement to the contrary, documents of a beneficiary
delivered to an issuer or nominated person are considered to be presented under
the letter of credit to which they refer, and any payment or value given for them
is considered to be made under that letter of credit. As the court held in Alaska
Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 820 (2d Cir. 1992), it
takes a "significant showing" to make the presentation of a beneficiary's
documents for "collection only" or otherwise outside letter of credit law and
practice.
10. Although a successor of a beneficiary is one who succeeds "by operation of
law," some of the successions contemplated by Section 5-102(a)(15) will have
resulted from voluntary action of the beneficiary such as merger of a
corporation. Any merger makes the successor corporation the "successor of a
beneficiary" even though the transfer occurs partly by operation of law and partly
by the voluntary action of the parties. The definition excludes certain transfers,
where no part of the transfer is "by operation of law" -- such as the sale of assets
by one company to another.
11. "Draft" in Article 5 does not have the same meaning it has in Article 3. For
example, a document may be a draft under Article 5 even though it would not be
a negotiable instrument, and therefore would not qualify as a draft under Section
3-104(e).
Official Comment § 5-103.
1. Sections 5-102(a)(10) and 5-103 are the principal limits on the scope of
Article 5. Many undertakings in commerce and contract are similar, but not
identical to the letter of credit. Principal among those are "secondary,"
"accessory," or "suretyship" guarantees. Although the word "guarantee" is
sometimes used to describe an independent obligation like that of the issuer of a
letter of credit (most often in the case of European bank undertakings but
occasionally in the case of undertakings of American banks), in the United States
the word "guarantee" is more typically used to describe a suretyship transaction
in which the "guarantor" is only secondarily liable and has the right to assert the
underlying debtor's defenses. This article does not apply to secondary or
accessory guarantees and it is important to recognize the distinction between
letters of credit and those guarantees. It is often a defense to a secondary or
accessory guarantor's liability that the underlying debt has been discharged or
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that the debtor has other defenses to the underlying liability. In letter of credit
law, on the other hand, the independence principle recognized throughout Article
5 states that the issuer's liability is independent of the underlying obligation.
That the beneficiary may have breached the underlying contract and thus have
given a good defense on that contract to the applicant against the beneficiary is
no defense for the issuer's refusal to honor. Only staunch recognition of this
principle by the issuers and the courts will give letters of credit the continuing
vitality that arises from the certainty and speed of payment under letters of
credit. To that end, it is important that the law not carry into letter of credit
transactions rules that properly apply only to secondary guarantees or to other
forms of engagement.
2. Like all of the provisions of the Uniform Commercial Code, Article 5 is
supplemented by Section 1-103 and, through it, by many rules of statutory and
common law. Because this article is quite short and has no rules on many issues
that will affect liability with respect to a letter of credit transaction, law beyond
Article 5 will often determine rights and liabilities in letter of credit transactions.
Even within letter of credit law, the article is far from comprehensive; it deals
only with "certain" rights of the parties. Particularly with respect to the
standards of performance that are set out in Section 5-108, it is appropriate for
the parties and the courts to turn to customs and practice such as the Uniform
Customs and Practice for Documentary Credits, currently published by the
International Chamber of Commerce as I.C.C. Pub. No. 500 (hereafter UCP).
Many letters of credit specifically adopt the UCP as applicable to the particular
transaction. Where the UCP are adopted but conflict with Article 5 and except
where variation is prohibited, the UCP terms are permissible contractual
modifications under Sections 1-302 and 5-103(c). See Section 5-116(c).
Normally Article 5 should not be considered to conflict with practice except when
a rule explicitly stated in the UCP or other practice is different from a rule
explicitly stated in Article 5.
Except by choosing the law of a jurisdiction that has not adopted the Uniform
Commercial Code, it is not possible entirely to escape the Uniform Commercial
Code. Since incorporation of the UCP avoids only "conflicting" Article 5 rules,
parties who do not wish to be governed by the nonconflicting provisions of Article
5 must normally either adopt the law of a jurisdiction other than a State of the
United States or state explicitly the rule that is to govern. When rules of custom
and practice are incorporated by reference, they are considered to be explicit
terms of the agreement or undertaking.
Neither the obligation of an issuer under Section 5-108 nor that of an adviser
under Section 5-107 is an obligation of the kind that is invariable under Section
1-102(3). Section 5-103(c) and Comment 1 to Section 5-108 make it clear that
the applicant and the issuer may agree to almost any provision establishing the
obligations of the issuer to the applicant. The last sentence of subsection (c)
limits the power of the issuer to achieve that result by a nonnegotiated disclaimer
or limitation of remedy.
What the issuer could achieve by an explicit agreement with its applicant or by a
term that explicitly defines its duty, it cannot accomplish by a general
disclaimer. The restriction on disclaimers in the last sentence of subsection (c) is
based more on procedural than on substantive unfairness. Where, for example,
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the reimbursement agreement provides explicitly that the issuer need not
examine any documents, the applicant understands the risk it has undertaken. A
term in a reimbursement agreement which states generally that an issuer will not
be liable unless it has acted in "bad faith" or committed "gross negligence" is
ineffective under Section 5-103(c). On the other hand, less general terms such
as terms that permit issuer reliance on an oral or electronic message believed in
good faith to have been received from the applicant or terms that entitle an
issuer to reimbursement when it honors a "substantially" though not "strictly"
complying presentation, are effective. In each case the question is whether the
disclaimer or limitation is sufficiently clear and explicit in reallocating a liability or
risk that is allocated differently under a variable Article 5 provision.
Of course, no term in a letter of credit, whether incorporated by reference to
practice rules or stated specifically, can free an issuer from a conflicting
contractual obligation to its applicant. If, for example, an issuer promised its
applicant that it would pay only against an inspection certificate of a particular
company but failed to require such a certificate in its letter of credit or made the
requirement only a nondocumentary condition that had to be disregarded, the
issuer might be obliged to pay the beneficiary even though its payment might
violate its contract with its applicant.
3. Parties should generally avoid modifying the definitions in Section 5-102. The
effect of such an agreement is almost inevitably unclear. To say that something
is a "guarantee" in the typical domestic transaction is to say that the parties
intend that particular legal rules apply to it. By acknowledging that something is
a guarantee, but asserting that it is to be treated as a "letter of credit," the
parties leave a court uncertain about where the rules on guarantees stop and
those concerning letters of credit begin.
4. Section 5-102(2) and (3) of Article 5 are omitted as unneeded; the omission
does not change the law.
Official Comment § 5-104.
1. Neither Section 5-104 nor the definition of letter of credit in Section 5102(a)(10)
requires inclusion of all the terms that are normally contained in a
letter of credit in order for an undertaking to be recognized as a letter of credit
under Article 5. For example, a letter of credit will typically specify the amount
available, the expiration date, the place where presentation should be made, and
the documents that must be presented to entitle a person to honor.
Undertakings that have the formalities required by Section 5-104 and meet the
conditions specified in Section 5-102(a)(10) will be recognized as letters of credit
even though they omit one or more of the items usually contained in a letter of
credit.
2. The authentication specified in this section is authentication only of the
identity of the issuer, confirmer, or adviser.
An authentication agreement may be by system rule, by standard practice, or by
direct agreement between the parties. The reference to practice is intended to
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incorporate future developments in the UCP and other practice rules as well as
those that may arise spontaneously in commercial practice.
3. Many banking transactions, including the issuance of many letters of credit,
are now conducted mostly by electronic means. For example, S.W.I.F.T. is
currently used to transmit letters of credit from issuing to advising banks. The
letter of credit text so transmitted may be printed at the advising bank, stamped
"original" and provided to the beneficiary in that form. The printed document
may then be used as a way of controlling and recording payments and of
recording and authorizing assignments of proceeds or transfers of rights under
the letter of credit. Nothing in this section should be construed to conflict with
that practice.
To be a record sufficient to serve as a letter of credit or other undertaking under
this section, data must have a durability consistent with that function. Because
consideration is not required for a binding letter of credit or similar undertaking
(Section 5-105) yet those undertakings are to be strictly construed (Section 5108),
parties to a letter of credit transaction are especially dependent on the
continued availability of the terms and conditions of the letter of credit or other
undertaking. By declining to specify any particular medium in which the letter of
credit must be established or communicated, Section 5-104 leaves room for
future developments.
Official Comment § 5-105.
It is not to be expected that any issuer will issue its letter of credit without some
form of remuneration. But it is not expected that the beneficiary will know what
the issuer's remuneration was or whether in fact there was any identifiable
remuneration in a given case. And it might be difficult for the beneficiary to
prove the issuer's remuneration. This section dispenses with this proof and is
consistent with the position of Lord Mansfield in Pillans v. Van Mierop, 97
Eng.Rep. 1035 (K.B. 1765) in making consideration irrelevant.
Official Comment § 5-106.
1. This section adopts the position taken by several courts, namely that letters
of credit that are silent as to revocability are irrevocable. See, e.g.,
Weyerhaeuser Co. v. First Nat. Bank, 27 UCC Rep. Serv. 777 (S.D. Iowa 1979);
West Va. Hous. Dev. Fund v. Sroka, 415 F. Supp. 1107 (W.D. Pa. 1976). This is
the position of the current UCP (500). Given the usual commercial understanding
and purpose of letters of credit, revocable letters of credit offer unhappy
possibilities for misleading the parties who deal with them.
2. A person can consent to an amendment by implication. For example, a
beneficiary that tenders documents for honor that conform to an amended letter
of credit but not to the original letter of credit has probably consented to the
amendment. By the same token an applicant that has procured the issuance of a
transferable letter of credit has consented to its transfer and to performance
under the letter of credit by a person to whom the beneficiary's rights are duly
transferred. If some, but not all of the persons involved in a letter of credit
transaction consent to performance that does not strictly conform to the original
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letter of credit, those persons assume the risk that other nonconsenting persons
may insist on strict compliance with the original letter of credit. Under
subsection (b) those not consenting are not bound. For example, an issuer might
agree to amend its letter of credit or honor documents presented after the
expiration date in the belief that the applicant has consented or will consent to
the amendment or will waive presentation after the original expiration date. If
that belief is mistaken, the issuer is bound to the beneficiary by the terms of the
letter of credit as amended or waived, even though it may be unable to recover
from the applicant.
In general, the rights of a recognized transferee beneficiary cannot be altered
without the transferee's consent, but the same is not true of the rights of
assignees of proceeds from the beneficiary. When the beneficiary makes a
complete transfer of its interest that is effective under the terms for transfer
established by the issuer, adviser, or other party controlling transfers, the
beneficiary no longer has an interest in the letter of credit, and the transferee
steps into the shoes of the beneficiary as the one with rights under the letter of
credit. Section 5-102(a)(3). When there is a partial transfer, both the original
beneficiary and the transferee beneficiary have an interest in performance of the
letter of credit and each expects that its rights will not be altered by amendment
unless it consents.
The assignee of proceeds under a letter of credit from the beneficiary enjoys no
such expectation. Notwithstanding an assignee's notice to the issuer of the
assignment of proceeds, the assignee is not a person protected by subsection
(b). An assignee of proceeds should understand that its rights can be changed or
completely extinguished by amendment or cancellation of the letter of credit. An
assignee's claim is precarious, for it depends entirely upon the continued
existence of the letter of credit and upon the beneficiary's preparation and
presentation of documents that would entitle the beneficiary to honor under
Section 5-108.
3. The issuer's right to cancel a revocable letter of credit does not free it from a
duty to reimburse a nominated person who has honored, accepted, or
undertaken a deferred obligation prior to receiving notice of the amendment or
cancellation. Compare UCP Article 8.
4. Although all letters of credit should specify the date on which the issuer's
engagement expires, the failure to specify an expiration date does not invalidate
the letter of credit, or diminish or relieve the obligation of any party with respect
to the letter of credit. A letter of credit that may be revoked or terminated at the
discretion of the issuer by notice to the beneficiary is not "perpetual."
Official Comment § 5-107.
1. A confirmer has the rights and obligations identified in Section 5-108.
Accordingly, unless the context otherwise requires, the terms "confirmer" and
"confirmation" should be read into this article wherever the terms "issuer" and
"letter of credit" appear.
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A confirmer that has paid in accordance with the terms and conditions of the
letter of credit is entitled to reimbursement by the issuer even if the beneficiary
committed fraud (see Section 5-109(a)(1)(ii)) and, in that sense, has greater
rights against the issuer than the beneficiary has. To be entitled to
reimbursement from the issuer under the typical confirmed letter of credit, the
confirmer must submit conforming documents, but the confirmer's presentation
to the issuer need not be made before the expiration date of the letter of credit.
A letter of credit confirmation has been analogized to a guarantee of issuer
performance, to a parallel letter of credit issued by the confirmer for the account
of the issuer or the letter of credit applicant or both, and to a back-to-back letter
of credit in which the confirmer is a kind of beneficiary of the original issuer's
letter of credit. Like letter of credit undertakings, confirmations are both unique
and flexible, so that no one of these analogies is perfect, but unless otherwise
indicated in the letter of credit or confirmation, a confirmer should be viewed by
the letter of credit issuer and the beneficiary as an issuer of a parallel letter of
credit for the account of the original letter of credit issuer. Absent a direct
agreement between the applicant and a confirmer, normally the obligations of a
confirmer are to the issuer not the applicant, but the applicant might have a right
to injunction against a confirmer under Section 5-109 or warranty claim under
Section 5-110, and either might have claims against the other under Section 5-
117.
2. No one has a duty to advise until that person agrees to be an adviser or
undertakes to act in accordance with the instructions of the issuer. Except where
there is a prior agreement to serve or where the silence of the adviser would be
an acceptance of an offer to contract, a person's failure to respond to a request
to advise a letter of credit does not in and of itself create any liability, nor does it
establish a relationship of issuer and adviser between the two. Since there is no
duty to advise a letter of credit in the absence of a prior agreement, there can be
no duty to advise it timely or at any particular time. When the adviser manifests
its agreement to advise by actually doing so (as is normally the case), the
adviser cannot have violated any duty to advise in a timely way. This analysis is
consistent with the result of Sound of Market Street v. Continental Bank
International, 819 F.2d 384 (3d Cir. 1987) which held that there is no such duty.
This section takes no position on the reasoning of that case, but does not
overrule the result. By advising or agreeing to advise a letter of credit, the
adviser assumes a duty to the issuer and to the beneficiary accurately to report
what it has received from the issuer, but, beyond determining the apparent
authenticity of the letter, an adviser has no duty to investigate the accuracy of
the message it has received from the issuer. "Checking" the apparent
authenticity of the request to advise means only that the prospective adviser
must attempt to authenticate the message (e.g., by "testing" the telex that
comes from the purported issuer), and if it is unable to authenticate the message
must report that fact to the issuer and, if it chooses to advise the message, to
the beneficiary. By proper agreement, an adviser may disclaim its obligation
under this section.
3. An issuer may issue a letter of credit which the adviser may advise with
different terms. The issuer may then believe that it has undertaken a certain
engagement, yet the text in the hands of the beneficiary will contain different
terms, and the beneficiary would not be entitled to honor if the documents it
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submitted did not comply with the terms of the letter of credit as originally
issued. On the other hand, if the adviser also confirmed the letter of credit, then
as a confirmer it will be independently liable on the letter of credit as advised and
confirmed. If in that situation the beneficiary's ultimate presentation entitled it
to honor under the terms of the confirmation but not under those in the original
letter of credit, the confirmer would have to honor but might not be entitled to
reimbursement from the issuer.
4. When the issuer nominates another person to "pay," "negotiate," or otherwise
to take up the documents and give value, there can be confusion about the legal
status of the nominated person. In rare cases the person might actually be an
agent of the issuer and its act might be the act of the issuer itself. In most cases
the nominated person is not an agent of the issuer and has no authority to act on
the issuer's behalf. Its "nomination" allows the beneficiary to present to it and
earns it certain rights to payment under Section 5-109 that others do not enjoy.
For example, when an issuer issues a "freely negotiable credit," it contemplates
that banks or others might take up documents under that credit and advance
value against them, and it is agreeing to pay those persons but only if the
presentation to the issuer made by the nominated person complies with the
credit. Usually there will be no agreement to pay, negotiate, or to serve in any
other capacity by the nominated person, therefore the nominated person will
have the right to decline to take the documents. It may return them or agree
merely to act as a forwarding agent for the documents but without giving value
against them or taking any responsibility for their conformity to the letter of
credit.
Official Comment § 5-108.
1. This section combines some of the duties previously included in Sections 5114
and 5-109. Because a confirmer has the rights and duties of an issuer, this
section applies equally to a confirmer and an issuer. See Section 5-107(a).
The standard of strict compliance governs the issuer's obligation to the
beneficiary and to the applicant. By requiring that a "presentation" appear
strictly to comply, the section requires not only that the documents themselves
appear on their face strictly to comply, but also that the other terms of the letter
of credit such as those dealing with the time and place of presentation are strictly
complied with. Typically, a letter of credit will provide that presentation is timely
if made to the issuer, confirmer, or any other nominated person prior to
expiration of the letter of credit. Accordingly, a nominated person that has
honored a demand or otherwise given value before expiration will have a right to
reimbursement from the issuer even though presentation to the issuer is made
after the expiration of the letter of credit. Conversely, where the beneficiary
negotiates documents to one who is not a nominated person, the beneficiary or
that person acting on behalf of the beneficiary must make presentation to a
nominated person, confirmer, or issuer prior to the expiration date.
This section does not impose a bifurcated standard under which an issuer's right
to reimbursement might be broader than a beneficiary's right to honor.
However, the explicit deference to standard practice in Section 5-108(a) and (e)
and elsewhere expands issuers' rights of reimbursement where that practice so
provides. Also, issuers can and often do contract with their applicants for
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expanded rights of reimbursement. Where that is done, the beneficiary will have
to meet a more stringent standard of compliance as to the issuer than the issuer
will have to meet as to the applicant. Similarly, a nominated person may have
reimbursement and other rights against the issuer based on this article, the UCP,
bank-to-bank reimbursement rules, or other agreement or undertaking of the
issuer. These rights may allow the nominated person to recover from the issuer
even when the nominated person would have no right to obtain honor under the
letter of credit.
The section adopts strict compliance, rather than the standard that
commentators have called "substantial compliance," the standard arguably
applied in Banco Espaol de Credito v. State Street Bank and Trust Company,
385 F.2d 230 (1st Cir. 1967) and Flagship Cruises Ltd. v. New England Merchants
Nat. Bank, 569 F.2d 699 (1st Cir. 1978). Strict compliance does not mean
slavish conformity to the terms of the letter of credit. For example, standard
practice (what issuers do) may recognize certain presentations as complying that
an unschooled layman would regard as discrepant. By adopting standard
practice as a way of measuring strict compliance, this article indorses the
conclusion of the court in New Braunfels Nat. Bank v. Odiorne, 780 S.W.2d 313
(Tex.Ct.App. 1989) (beneficiary could collect when draft requested payment on
'Letter of Credit No. 86 122 5' and letter of credit specified 'Letter of Credit No.
86 122 S' holding strict compliance does not demand oppressive perfectionism).
The section also indorses the result in Tosco Corp. v. Federal Deposit Insurance
Corp., 723 F.2d 1242 (6th Cir. 1983). The letter of credit in that case called for
"drafts Drawn under Bank of Clarksville Letter of Credit Number 105." The draft
presented stated "drawn under Bank of Clarksville, Clarksville, Tennessee letter
of Credit No. 105." The court correctly found that despite the change of upper
case "L" to a lower case "l" and the use of the word "No." instead of "Number,"
and despite the addition of the words "Clarksville, Tennessee," the presentation
conformed. Similarly a document addressed by a foreign person to General
Motors as "Jeneral Motors" would strictly conform in the absence of other defects.
Identifying and determining compliance with standard practice are matters of
interpretation for the court, not for the jury. As with similar rules in Sections 4A202(c)
and 2-302, it is hoped that there will be more consistency in the outcomes
and speedier resolution of disputes if the responsibility for determining the nature
and scope of standard practice is granted to the court, not to a jury. Granting
the court authority to make these decisions will also encourage the salutary
practice of courts' granting summary judgment in circumstances where there are
no significant factual disputes. The statute encourages outcomes such as
American Coleman Co. v. Intrawest Bank, 887 F.2d 1382 (10th Cir. 1989), where
summary judgment was granted.
In some circumstances standards may be established between the issuer and the
applicant by agreement or by custom that would free the issuer from liability that
it might otherwise have. For example, an applicant might agree that the issuer
would have no duty whatsoever to examine documents on certain presentations
(e.g., those below a certain dollar amount). Where the transaction depended
upon the issuer's payment in a very short time period (e.g., on the same day or
within a few hours of presentation), the issuer and the applicant might agree to
reduce the issuer's responsibility for failure to discover discrepancies. By the
same token, an agreement between the applicant and the issuer might permit
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the issuer to examine documents exclusively by electronic or electro-optical
means. Neither those agreements nor others like them explicitly made by
issuers and applicants violate the terms of Section 5-108(a) or (b) or Section 5-
103(c).
2. Section 5-108(a) balances the need of the issuer for time to examine the
documents against the possibility that the examiner (at the urging of the
applicant or for fear that it will not be reimbursed) will take excessive time to
search for defects. What is a "reasonable time" is not extended to accommodate
an issuer's procuring a waiver from the applicant. See Article 14c of the UCP.
Under both the UCC and the UCP the issuer has a reasonable time to honor or
give notice. The outside limit of that time is measured in business days under
the UCC and in banking days under the UCP, a difference that will rarely be
significant. Neither business nor banking days are defined in Article 5, but a
court may find useful analogies in Regulation CC, 12 CFR 229.2, in state law
outside of the Uniform Commercial Code, and in Article 4.
Examiners must note that the seven-day period is not a safe harbor. The time
within which the issuer must give notice is the lesser of a reasonable time or
seven business days. Where there are few documents (as, for example, with the
mine run standby letter of credit), the reasonable time would be less than seven
days. If more than a reasonable time is consumed in examination, no timely
notice is possible. What is a "reasonable time" is to be determined by examining
the behavior of those in the business of examining documents, mostly banks.
Absent prior agreement of the issuer, one could not expect a bank issuer to
examine documents while the beneficiary waited in the lobby if the normal
practice was to give the documents to a person who had the opportunity to
examine those together with many others in an orderly process. That the
applicant has not yet paid the issuer or that the applicanťs account with the
issuer is insufficient to cover the amount of the draft is not a basis for extension
of the time period.
This section does not preclude the issuer from contacting the applicant during its
examination; however, the decision to honor rests with the issuer, and it has no
duty to seek a waiver from the applicant or to notify the applicant of receipt of
the documents. If the issuer dishonors a conforming presentation, the
beneficiary will be entitled to the remedies under Section 5-111, irrespective of
the applicanťs views.
Even though the person to whom presentation is made cannot conduct a
reasonable examination of documents within the time after presentation and
before the expiration date, presentation establishes the parties' rights. The
beneficiary's right to honor or the issuer's right to dishonor arises upon
presentation at the place provided in the letter of credit even though it might
take the person to whom presentation has been made several days to determine
whether honor or dishonor is the proper course. The issuer's time for honor or
giving notice of dishonor may be extended or shortened by a term in the letter of
credit. The time for the issuer's performance may be otherwise modified or
waived in accordance with Section 5-106.
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The issuer's time to inspect runs from the time of its "receipt of documents."
Documents are considered to be received only when they are received at the
place specified for presentation by the issuer or other party to whom presentation
is made. "Receipt of documents" when documents are presented must be read in
light of the definition of "delivery" in Article 1, Section 1-201 and the definition of
"presentment" in Section 5-102(a)(12).
Failure of the issuer to act within the time permitted by subsection (b) constitutes
dishonor. Because of the preclusion in subsection (c) and the liability that the
issuer may incur under Section 5-111 for wrongful dishonor, the effect of such a
silent dishonor may ultimately be the same as though the issuer had honored,
i.e., it may owe damages in the amount drawn but unpaid under the letter of
credit.
3. The requirement that the issuer send notice of the discrepancies or be
precluded from asserting discrepancies is new to Article 5. It is taken from the
similar provision in the UCP and is intended to promote certainty and finality.
The section thus substitutes a strict preclusion principle for the doctrines of
waiver and estoppel that might otherwise apply under Section 1-103. It rejects
the reasoning in Flagship Cruises Ltd. v. New England Merchants' Nat. Bank, 569
F.2d 699 (1st Cir. 1978) and Wing On Bank Ltd. v. American Nat. Bank & Trust
Co., 457 F.2d 328 (5th Cir. 1972) where the issuer was held to be estopped only
if the beneficiary relied on the issuer's failure to give notice.
Assume, for example, that the beneficiary presented documents to the issuer
shortly before the letter of credit expired, in circumstances in which the
beneficiary could not have cured any discrepancy before expiration. Under the
reasoning of Flagship and Wing On, the beneficiary's inability to cure, even if it
had received notice, would absolve the issuer of its failure to give notice. The
virtue of the preclusion obligation adopted in this section is that it forecloses
litigation about reliance and detriment.
Even though issuers typically give notice of the discrepancy of tardy presentation
when presentation is made after the expiration of a credit, they are not required
to give that notice and the section permits them to raise late presentation as a
defect despite their failure to give that notice.
4. To act within a reasonable time, the issuer must normally give notice without
delay after the examining party makes its decision. If the examiner decides to
dishonor on the first day, it would be obliged to notify the beneficiary shortly
thereafter, perhaps on the same business day. This rule accepts the reasoning in
cases such as Datapoint Corp. v. M & I Bank, 665 F. Supp. 722 (W.D. Wis. 1987)
and Esso Petroleum Canada, Div. of Imperial Oil, Ltd. v. Security Pacific Bank,
710 F. Supp. 275 (D. Ore. 1989).
The section deprives the examining party of the right simply to sit on a
presentation that is made within seven days of expiration. The section requires
the examiner to examine the documents and make a decision and, having made
a decision to dishonor, to communicate promptly with the presenter.
Nevertheless, a beneficiary who presents documents shortly before the expiration
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of a letter of credit runs the risk that it will never have the opportunity to cure
any discrepancies.
5. Confirmers, other nominated persons, and collecting banks acting for
beneficiaries can be presenters and, when so, are entitled to the notice provided
in subsection (b). Even nominated persons who have honored or given value
against an earlier presentation of the beneficiary and are themselves seeking
reimbursement or honor need notice of discrepancies in the hope that they may
be able to procure complying documents. The issuer has the obligations imposed
by this section whether the issuer's performance is characterized as
"reimbursement" of a nominated person or as "honor."
6. In many cases a letter of credit authorizes presentation by the beneficiary to
someone other than the issuer. Sometimes that person is identified as a "payor"
or "paying bank," or as an "acceptor" or "accepting bank," in other cases as a
"negotiating bank," and in other cases there will be no specific designation. The
section does not impose any duties on a person other than the issuer or
confirmer, however a nominated person or other person may have liability under
this article or at common law if it fails to perform an express or implied
agreement with the beneficiary.
7. The issuer's obligation to honor runs not only to the beneficiary but also to
the applicant. It is possible that an applicant who has made a favorable contract
with the beneficiary will be injured by the issuer's wrongful dishonor. Except to
the extent that the contract between the issuer and the applicant limits that
liability, the issuer will have liability to the applicant for wrongful dishonor under
Section 5-111 as a matter of contract law. A good faith extension of the time in
Section 5-108(b) by agreement between the issuer and beneficiary binds the
applicant even if the applicant is not consulted or does not consent to the
extension.
The issuer's obligation to dishonor when there is no apparent compliance with the
letter of credit runs only to the applicant. No other party to the transaction can
complain if the applicant waives compliance with terms or conditions of the letter
of credit or agrees to a less stringent standard for compliance than that supplied
by this article. Except as otherwise agreed with the applicant, an issuer may
dishonor a noncomplying presentation despite an applicanťs waiver.
Waiver of discrepancies by an issuer or an applicant in one or more presentations
does not waive similar discrepancies in a future presentation. Neither the issuer
nor the beneficiary can reasonably rely upon honor over past waivers as a basis
for concluding that a future defective presentation will justify honor. The
reasoning of Courtaulds of North America Inc. v. North Carolina Nat. Bank, 528
F.2d 802 (4th Cir. 1975) is accepted and that expressed in Schweibish v.
Pontchartrain State Bank, 389 So.2d 731 (La.App. 1980) and Titanium Metals
Corp. v. Space Metals, Inc., 529 P.2d 431 (Utah 1974) is rejected.
8. The standard practice referred to in subsection (e) includes (i) international
practice set forth in or referenced by the Uniform Customs and Practice, (ii) other
practice rules published by associations of financial institutions, and (iii) local and
regional practice. It is possible that standard practice will vary from one place to
another. Where there are conflicting practices, the parties should indicate which
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practice governs their rights. A practice may be overridden by agreement or
course of dealing. See Section 1-205(4).
9. The responsibility of the issuer under a letter of credit is to examine
documents and to make a prompt decision to honor or dishonor based upon that
examination. Nondocumentary conditions have no place in this regime and are
better accommodated under contract or suretyship law and practice. In requiring
that nondocumentary conditions in letters of credit be ignored as surplusage,
Article 5 remains aligned with the UCP (see UCP 500 Article 13c), approves cases
like Pringle-Associated Mortgage Corp. v. Southern National Bank, 571 F.2d 871,
874 (5th Cir. 1978), and rejects the reasoning in cases such as Sherwood &
Roberts, Inc. v. First Security Bank, 682 P.2d 149 (Mont. 1984).
Subsection (g) recognizes that letters of credit sometimes contain
nondocumentary terms or conditions. Conditions such as a term prohibiting
"shipment on vessels more than 15 years old," are to be disregarded and treated
as surplusage. Similarly, a requirement that there be an award by a "duly
appointed arbitrator" would not require the issuer to determine whether the
arbitrator had been "duly appointed." Likewise a term in a standby letter of
credit that provided for differing forms of certification depending upon the
particular type of default does not oblige the issuer independently to determine
which kind of default has occurred. These conditions must be disregarded by the
issuer. Where the nondocumentary conditions are central and fundamental to
the issuer's obligation (as for example a condition that would require the issuer
to determine in fact whether the beneficiary had performed the underlying
contract or whether the applicant had defaulted) their inclusion may remove the
undertaking from the scope of Article 5 entirely. See Section 5-102(a)(10) and
Comment 6 to Section 5-102.
Subsection (g) would not permit the beneficiary or the issuer to disregard terms
in the letter of credit such as place, time, and mode of presentation. The rule in
subsection (g) is intended to prevent an issuer from deciding or even
investigating extrinsic facts, but not from consulting the clock, the calendar, the
relevant law and practice, or its own general knowledge of documentation or
transactions of the type underlying a particular letter of credit.
Even though nondocumentary conditions must be disregarded in determining
compliance of a presentation (and thus in determining the issuer's duty to the
beneficiary), an issuer that has promised its applicant that it will honor only on
the occurrence of those nondocumentary conditions may have liability to its
applicant for disregarding the conditions.
10. Subsection (f) condones an issuer's ignorance of "any usage of a particular
trade"; that trade is the trade of the applicant, beneficiary, or others who may be
involved in the underlying transaction. The issuer is expected to know usage that
is commonly encountered in the course of document examination. For example,
an issuer should know the common usage with respect to documents in the
maritime shipping trade but would not be expected to understand synonyms used
in a particular trade for product descriptions appearing in a letter of credit or an
invoice.
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11. Where the issuer's performance is the delivery of an item of value other than
money, the applicanťs reimbursement obligation would be to make the "item of
value" available to the issuer.
12. An issuer is entitled to reimbursement from the applicant after honor of a
forged or fraudulent drawing if honor was permitted under Section 5-109(a).
13. The last clause of Section 5-108(i)(5) deals with a special case in which the
fraud is not committed by the beneficiary, but is committed by a stranger to the
transaction who forges the beneficiary's signature. If the issuer pays against
documents on which a required signature of the beneficiary is forged, it remains
liable to the true beneficiary. This principle is applicable to both electronic and
tangible documents.
Official Comment § 5-109.
1. This recodification makes clear that fraud must be found either in the
documents or must have been committed by the beneficiary on the issuer or
applicant. See Cromwell v. Commerce & Energy Bank, 464 So.2d 721 (La.
1985).
Secondly, it makes clear that fraud must be "material." Necessarily courts must
decide the breadth and width of "materiality." The use of the word requires that
the fraudulent aspect of a document be material to a purchaser of that document
or that the fraudulent act be significant to the participants in the underlying
transaction. Assume, for example, that the beneficiary has a contract to deliver
1,000 barrels of salad oil. Knowing that it has delivered only 998, the beneficiary
nevertheless submits an invoice showing 1,000 barrels. If two barrels in a 1,000
barrel shipment would be an insubstantial and immaterial breach of the
underlying contract, the beneficiary's act, though possibly fraudulent, is not
materially so and would not justify an injunction. Conversely, the knowing
submission of those invoices upon delivery of only five barrels would be
materially fraudulent. The courts must examine the underlying transaction when
there is an allegation of material fraud, for only by examining that transaction
can one determine whether a document is fraudulent or the beneficiary has
committed fraud and, if so, whether the fraud was material.
Material fraud by the beneficiary occurs only when the beneficiary has no
colorable right to expect honor and where there is no basis in fact to support
such a right to honor. The section indorses articulations such as those stated in
Intraworld Indus. v. Girard Trust Bank, 336 A.2d 316 (Pa. 1975), Roman
Ceramics Corp. v. People's Nat. Bank, 714 F.2d 1207 (3d Cir. 1983), and similar
decisions and embraces certain decisions under Section 5-114 that relied upon
the phrase "fraud in the transaction." Some of these decisions have been
summarized as follows in Ground Air Transfer v. Westate's Airlines, 899 F.2d
1269, 1272 73 (1st Cir. 1990):
We have said throughout that courts may not "normally" issue an injunction
because of an important exception to the general "no injunction" rule. The
exception, as we also explained in Itek, 730 F.2d at 24 25, concerns "fraud" so
serious as to make it obviously pointless and unjust to permit the beneficiary to
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obtain the money. Where the circumstances "plainly" show that the underlying
contract forbids the beneficiary to call a letter of credit, Itek, 730 F.2d at 24;
where they show that the contract deprives the beneficiary of even a "colorable"
right to do so, id., at 25; where the contract and circumstances reveal that the
beneficiary's demand for payment has "absolutely no basis in fact," id.; see
Dynamics Corp. of America, 356 F. Supp. at 999; where the beneficiary's conduct
has "so vitiated the entire transaction that the legitimate purposes of the
independence of the issuer's obligation would no longer be served," Itek, 730
F.2d at 25 (quoting Roman Ceramics Corp. v. Peoples National Bank, 714 F.2d
1207, 1212 n.12, 1215 (3d Cir. 1983) (quoting Intraworld Indus., 336 A.2d at
324 25)); then a court may enjoin payment.
2. Subsection (a)(2) makes clear that the issuer may honor in the face of the
applicanťs claim of fraud. The subsection also makes clear what was not stated
in former Section 5-114, that the issuer may dishonor and defend that dishonor
by showing fraud or forgery of the kind stated in subsection (a). Because issuers
may be liable for wrongful dishonor if they are unable to prove forgery or
material fraud, presumably most issuers will choose to honor despite applicanťs
claims of fraud or forgery unless the applicant procures an injunction. Merely
because the issuer has a right to dishonor and to defend that dishonor by
showing forgery or material fraud does not mean it has a duty to the applicant to
dishonor. The applicanťs normal recourse is to procure an injunction, if the
applicant is unable to procure an injunction, it will have a claim against the issuer
only in the rare case in which it can show that the issuer did not honor in good
faith.
3. Whether a beneficiary can commit fraud by presenting a draft under a clean
letter of credit (one calling only for a draft and no other documents) has been
much debated. Under the current formulation it would be possible but difficult
for there to be fraud in such a presentation. If the applicant were able to show
that the beneficiary were committing material fraud on the applicant in the
underlying transaction, then payment would facilitate a material fraud by the
beneficiary on the applicant and honor could be enjoined. The courts should be
skeptical of claims of fraud by one who has signed a "suicide" or clean credit and
thus granted a beneficiary the right to draw by mere presentation of a draft.
4. The standard for injunctive relief is high, and the burden remains on the
applicant to show, by evidence and not by mere allegation, that such relief is
warranted. Some courts have enjoined payments on letters of credit on
insufficient showing by the applicant. For example, in Griffin Cos. v. First Nat.
Bank, 374 N.W.2d 768 (Minn.App. 1985), the court enjoined payment under a
standby letter of credit, basing its decision on plaintiff's allegation, rather than
competent evidence, of fraud.
There are at least two ways to prohibit injunctions against honor under this
section after acceptance of a draft by the issuer. First is to define honor (see
Section 5-102(a)(8)) in the particular letter of credit to occur upon acceptance
and without regard to later payment of the acceptance. Second is explicitly to
agree that the applicant has no right to an injunction after acceptance whether
or not the acceptance constitutes honor.
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5. Although the statute deals principally with injunctions against honor, it also
cautions against granting "similar relief" and the same principles apply when the
applicant or issuer attempts to achieve the same legal outcome by injunction
against presentation (see Ground Air Transfer Inc. v. Westates Airlines, Inc., 899
F.2d 1269 (1st Cir. 1990)), interpleader, declaratory judgment, or attachment.
These attempts should face the same obstacles that face efforts to enjoin the
issuer from paying. Expanded use of any of these devices could threaten the
independence principle just as much as injunctions against honor. For that
reason courts should have the same hostility to them and place the same
restrictions on their use as would be applied to injunctions against honor. Courts
should not allow the "sacred cow of equity to trample the tender vines of letter of
credit law."
6. Section 5-109(a)(1) also protects specified third parties against the risk of
fraud. By issuing a letter of credit that nominates a person to negotiate or pay,
the issuer (ultimately the applicant) induces that nominated person to give value
and thereby assumes the risk that a draft drawn under the letter of credit will be
transferred to one with a status like that of a holder in due course who deserves
to be protected against a fraud defense.
7. The "loss" to be protected against -- by bond or otherwise under subsection
(b)(2) -- includes incidental damages. Among those are legal fees that might be
incurred by the beneficiary or issuer in defending against an injunction action.
Official Comment § 5-110.
1. Since the warranties in subsection (a) are not given unless a letter of credit
has been honored, no breach of warranty under this subsection can be a defense
to dishonor by the issuer. Any defense must be based on Section 5-108 or 5-109
and not on this section. Also, breach of the warranties by the beneficiary in
subsection (a) cannot excuse the applicanťs duty to reimburse.
2. The warranty in Section 5-110(a)(2) assumes that payment under the letter
of credit is final. It does not run to the issuer, only to the applicant. In most
cases the applicant will have a direct cause of action for breach of the underlying
contract. This warranty has primary application in standby letters of credit or
other circumstances where the applicant is not a party to an underlying contract
with the beneficiary. It is not a warranty that the statements made on the
presentation of the documents presented are truthful nor is it a warranty that the
documents strictly comply under Section 5-108(a). It is a warranty that the
beneficiary has performed all the acts expressly and implicitly necessary under
any underlying agreement to entitle the beneficiary to honor. If, for example, an
underlying sales contract authorized the beneficiary to draw only upon "due
performance" and the beneficiary drew even though it had breached the
underlying contract by delivering defective goods, honor of its draw would break
the warranty. By the same token, if the underlying contract authorized the
beneficiary to draw only upon actual default or upon its or a third party's
determination of default by the applicant and if the beneficiary drew in violation
of its authorization, then upon honor of its draw the warranty would be
breached. In many cases, therefore, the documents presented to the issuer will
contain inaccurate statements (concerning the goods delivered or concerning
default or other matters), but the breach of warranty arises not because the
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statements are untrue but because the beneficiary's drawing violated its express
or implied obligations in the underlying transaction.
3. The damages for breach of warranty are not specified in Section 5-111.
Courts may find damage analogies in Section 2-714 in Article 2 and in warranty
decisions under Articles 3 and 4.
Unlike wrongful dishonor cases -- where the damages usually equal the amount
of the draw -- the damages for breach of warranty will often be much less than
the amount of the draw, sometimes zero. Assume a seller entitled to draw only
on proper performance of its sales contract. Assume it breaches the sales
contract in a way that gives the buyer a right to damages but no right to reject.
The applicanťs damages for breach of the warranty in subsection (a)(2) are
limited to the damages it could recover for breach of the contract of sale.
Alternatively assume an underlying agreement that authorizes a beneficiary to
draw only the "amount in default." Assume a default of $200,000 and a draw of
$500,000. The damages for breach of warranty would be no more than
$300,000.
Official Comment § 5-111.
1. The right to specific performance is new. The express limitation on the duty
of the beneficiary to mitigate damages adopts the position of certain courts and
commentators. Because the letter of credit depends upon speed and certainty of
payment, it is important that the issuer not be given an incentive to dishonor.
The issuer might have an incentive to dishonor if it could rely on the burden of
mitigation falling on the beneficiary, (to sell goods and sue only for the difference
between the price of the goods sold and the amount due under the letter of
credit). Under the scheme contemplated by Section 5-111(a), the beneficiary
would present the documents to the issuer. If the issuer wrongfully dishonored,
the beneficiary would have no further duty to the issuer with respect to the goods
covered by documents that the issuer dishonored and returned. The issuer thus
takes the risk that the beneficiary will let the goods rot or be destroyed. Of
course the beneficiary may have a duty of mitigation to the applicant arising from
the underlying agreement, but the issuer would not have the right to assert that
duty by way of defense or setoff. See Section 5-117(d). If the beneficiary sells
the goods covered by dishonored documents or if the beneficiary sells a draft
after acceptance but before dishonor by the issuer, the net amount so gained
should be subtracted from the amount of the beneficiary's damages at least
where the damage claim against the issuer equals or exceeds the damage
suffered by the beneficiary. If, on the other hand, the beneficiary suffers
damages in an underlying transaction in an amount that exceeds the amount of
the wrongfully dishonored demand (e.g., where the letter of credit does not cover
100 percent of the underlying obligation), the damages avoided should not
necessarily be deducted from the beneficiary's claim against the issuer. In such
a case, the damages would be the lesser of (i) the amount recoverable in the
absence of mitigation (that is, the amount that is subject to the dishonor or
repudiation plus any incidental damages) and (ii) the damages remaining after
deduction for the amount of damages actually avoided.
A beneficiary need not present documents as a condition of suit for anticipatory
repudiation, but if a beneficiary could never have obtained documents necessary
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for a presentation conforming to the letter of credit, the beneficiary cannot
recover for anticipatory repudiation of the letter of credit. Doelger v. Battery
Park Bank, 201 A.D. 515, 194 N.Y.S. 582 (1922) and Decor by Nikkei Inťl, Inc.
v. Federal Republic of Nigeria, 497 F.Supp. 893 (S.D.N.Y. 1980), aff'd, 647 F.2d
300 (2d Cir. 1981), cert. denied, 454 U.S. 1148 (1982). The last sentence of
subsection (c) does not expand the liability of a confirmer to persons to whom
the confirmer would not otherwise be liable under Section 5-107.
Almost all letters of credit, including those that call for an acceptance, are
"obligations to pay money" as that term is used in Section 5-111(a).
2. What damages "result" from improper honor is for the courts to decide. Even
though an issuer pays a beneficiary in violation of Section 5-108(a) or of its
contract with the applicant, it may have no liability to an applicant. If the
underlying contract has been fully performed, the applicant may not have been
damaged by the issuer's breach. Such a case would occur when A contracts for
goods at $100 per ton, but, upon delivery, the market value of conforming goods
has decreased to $25 per ton. If the issuer pays over discrepancies, there should
be no recovery by A for the price differential if the issuer's breach did not alter
the applicanťs obligation under the underlying contract, i.e., to pay $100 per ton
for goods now worth $25 per ton. On the other hand, if the applicant intends to
resell the goods and must itself satisfy the strict compliance requirements under
a second letter of credit in connection with its sale, the applicant may be
damaged by the issuer's payment despite discrepancies because the applicant
itself may then be unable to procure honor on the letter of credit where it is the
beneficiary, and may be unable to mitigate its damages by enforcing its rights
against others in the underlying transaction. Note that an issuer found liable to
its applicant may have recourse under Section 5-117 by subrogation to the
applicanťs claim against the beneficiary or other persons.
One who inaccurately advises a letter of credit breaches its obligation to the
beneficiary, but may cause no damage. If the beneficiary knows the terms of the
letter of credit and understands the advice to be inaccurate, the beneficiary will
have suffered no damage as a result of the adviser's breach.
3. Since the confirmer has the rights and duties of an issuer, in general it has an
issuer's liability, see subsection (c). The confirmer is usually a confirming bank.
A confirming bank often also plays the role of an adviser. If it breaks its
obligation to the beneficiary, the confirming bank may have liability as an issuer
or, depending upon the obligation that was broken, as an adviser. For example,
a wrongful dishonor would give it liability as an issuer under Section 5-111(a).
On the other hand a confirming bank that broke its obligation to advise the credit
but did not commit wrongful dishonor would be treated under Section 5-111(c).
4. Consequential damages for breach of obligations under this article are
excluded in the belief that these damages can best be avoided by the beneficiary
or the applicant and out of the fear that imposing consequential damages on
issuers would raise the cost of the letter of credit to a level that might render it
uneconomic. A fortiori punitive and exemplary damages are excluded, however,
this section does not bar recovery of consequential or even punitive damages for
breach of statutory or common law duties arising outside of this article.
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5. The section does not specify a rate of interest. It leaves the setting of the
rate to the court. It would be appropriate for a court to use the rate that would
normally apply in that court in other situations where interest is imposed by law.
6. The court must award attorney's fees to the prevailing party, whether that
party is an applicant, a beneficiary, an issuer, a nominated person, or adviser.
Since the issuer may be entitled to recover its legal fees and costs from the
applicant under the reimbursement agreement, allowing the issuer to recover
those fees from a losing beneficiary may also protect the applicant against
undeserved losses. The party entitled to attorneys' fees has been described as
the "prevailing party." Sometimes it will be unclear which party "prevailed," for
example, where there are multiple issues and one party wins on some and the
other party wins on others. Determining which is the prevailing party is in the
discretion of the court. Subsection (e) authorizes attorney's fees in all actions
where a remedy is sought "under this article." It applies even when the remedy
might be an injunction under Section 5-109 or when the claimed remedy is
otherwise outside of Section 5-111. Neither an issuer nor a confirmer should be
treated as a "losing" party when an injunction is granted to the applicant over the
objection of the issuer or confirmer; accordingly neither should be liable for fees
and expenses in that case.
"Expenses of litigation" is intended to be broader than "costs." For example,
expense of litigation would include travel expenses of witnesses, fees for expert
witnesses, and expenses associated with taking depositions.
7. For the purposes of Section 5-111(f) "harm anticipated" must be anticipated
at the time when the agreement that includes the liquidated damage clause is
executed or at the time when the undertaking that includes the clause is issued.
See Section 2A-504.
Official Comment § 5-112.
1. In order to protect the applicanťs reliance on the designated beneficiary,
letter of credit law traditionally has forbidden the beneficiary to convey to third
parties its right to draw or demand payment under the letter of credit.
Subsection (a) codifies that rule. The term "transfer" refers to the beneficiary's
conveyance of that right. Absent incorporation of the UCP (which make elaborate
provision for partial transfer of a commercial letter of credit) or similar trade
practice and absent other express indication in the letter of credit that the term is
used to mean something else, a term in the letter of credit indicating that the
beneficiary has the right to transfer should be taken to mean that the beneficiary
may convey to a third party its right to draw or demand payment. Even in that
case, the issuer or other person controlling the transfer may make the
beneficiary's right to transfer subject to conditions, such as timely notification,
payment of a fee, delivery of the letter of credit to the issuer or other person
controlling the transfer, or execution of appropriate forms to document the
transfer. A nominated person who is not a confirmer has no obligation to
recognize a transfer.
The power to establish "requirements" does not include the right absolutely to
refuse to recognize transfers under a transferable letter of credit. An issuer who
wishes to retain the right to deny all transfers should not issue transferable
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letters of credit or should incorporate the UCP. By stating its requirements in the
letter of credit an issuer may impose any requirement without regard to its
conformity to practice or reasonableness. Transfer requirements of issuers and
nominated persons must be made known to potential transferors and transferees
to enable those parties to comply with the requirements. A common method of
making such requirements known is to use a form that indicates the information
that must be provided and the instructions that must be given to enable the
issuer or nominated person to comply with a request to transfer.
2. The issuance of a transferable letter of credit with the concurrence of the
applicant is ipso facto an agreement by the issuer and applicant to permit a
beneficiary to transfer its drawing right and permit a nominated person to
recognize and carry out that transfer without further notice to them. In
international commerce, transferable letters of credit are often issued under
circumstances in which a nominated person or adviser is expected to facilitate
the transfer from the original beneficiary to a transferee and to deal with that
transferee. In those circumstances it is the responsibility of the nominated
person or adviser to establish procedures satisfactory to protect itself against
double presentation or dispute about the right to draw under the letter of credit.
Commonly such a person will control the transfer by requiring that the original
letter of credit be given to it or by causing a paper copy marked as an original to
be issued where the original letter of credit was electronic. By keeping
possession of the original letter of credit the nominated person or adviser can
minimize or entirely exclude the possibility that the original beneficiary could
properly procure payment from another bank. If the letter of credit requires
presentation of the original letter of credit itself, no other payment could be
procured. In addition to imposing whatever requirements it considers
appropriate to protect itself against double payment the person that is facilitating
the transfer has a right to charge an appropriate fee for its activity.
"Transfer" of a letter of credit should be distinguished from "assignment of
proceeds." The former is analogous to a novation or a substitution of
beneficiaries. It contemplates not merely payment to but also performance by
the transferee. For example, under the typical terms of transfer for a commercial
letter of credit, a transferee could comply with a letter of credit transferred to it
by signing and presenting its own draft and invoice. An assignee of proceeds, on
the other hand, is wholly dependent on the presentation of a draft and invoice
signed by the beneficiary.
By agreeing to the issuance of a transferable letter of credit, which is not
qualified or limited, the applicant may lose control over the identity of the person
whose performance will earn payment under the letter of credit.
Official Comment § 5-113.
This section affirms the result in Pastor v. Nat. Republic Bank of Chicago, 76
Ill.2d 139, 390 N.E.2d 894 (Ill. 1979) and Federal Deposit Insurance Co. v. Bank
of Boulder, 911 F.2d 1466 (10th Cir. 1990). Both electronic and tangible
documents may be signed.
An issuer's requirements for recognition of a successor's status might include
presentation of a certificate of merger, a court order appointing a bankruptcy
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trustee or receiver, a certificate of appointment as bankruptcy trustee, or the
like. The issuer is entitled to rely upon such documents which on their face
demonstrate that presentation is made by a successor of a beneficiary. It is not
obliged to make an independent investigation to determine the fact of
succession.
Official Comment § 5-114.
1. Subsection (b) expressly validates the beneficiary's present assignment of
letter of credit proceeds if made after the credit is established but before the
proceeds are realized. This section adopts the prevailing usage -- "assignment of
proceeds" -- to an assignee. That terminology carries with it no implication,
however, that an assignee acquires no interest until the proceeds are paid by the
issuer. For example, an "assignment of the right to proceeds" of a letter of credit
for purposes of security that meets the requirements of Section 9-203(b) would
constitute the present creation of a security interest in a "letter-of-credit right."
This security interest can be perfected by control (Section 9-107) if the letter of
credit is in written form. Although subsection (a) explains the meaning of
"'proceeds' of a letter of credit," it should be emphasized that those proceeds
also may be Article 9 proceeds of other collateral. For example, if a seller of
inventory receives a letter of credit to support the account that arises upon the
sale, payments made under the letter of credit are Article 9 proceeds of the
inventory, account, and any document of title covering the inventory. Thus, the
secured party who had a perfected security interest in that inventory, account, or
document has a perfected security interest in the proceeds collected under the
letter of credit, so long as they are identifiable cash proceeds (Section 9315(a),(d)).
This perfection is continuous, regardless of whether the secured
party perfected a security interest in the right to letter of credit proceeds.
2. An assignee's rights to enforce an assignment of proceeds against an issuer
and the priority of the assignee's rights against a nominated person or transferee
beneficiary are governed by Article 5. Those rights and that priority are stated in
subsections (c), (d), and (e). Note also that Section 4-210 gives first priority to
a collecting bank that has given value for a documentary draft.
3. By requiring that an issuer or nominated person consent to the assignment of
proceeds of a letter of credit, subsections (c) and (d) follow more closely
recognized national and international letter of credit practices than did prior law.
In most circumstances, it has always been advisable for the assignee to obtain
the consent of the issuer in order better to safeguard its right to the proceeds.
When notice of an assignment has been received, issuers normally have required
signatures on a consent form. This practice is reflected in the revision. By
unconditionally consenting to such an assignment, the issuer or nominated
person becomes bound, subject to the rights of the superior parties specified in
subsection (e), to pay to the assignee the assigned letter of credit proceeds that
the issuer or nominated person would otherwise pay to the beneficiary or another
assignee.
Where the letter of credit must be presented as a condition to honor and the
assignee holds and exhibits the letter of credit to the issuer or nominated person,
the risk to the issuer or nominated person of having to pay twice is minimized.
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In such a situation, subsection (d) provides that the issuer or nominated person
may not unreasonably withhold its consent to the assignment.
Official Comment § 5-115.
1. This section is based upon Sections 4-111 and 2-725(2).
2. This section applies to all claims for which there are remedies under Section
5-111 and to other claims made under this article, such as claims for breach of
warranty under Section 5-110. Because it covers all claims under Section 5-111,
the statute of limitations applies not only to wrongful dishonor claims against the
issuer but also to claims between the issuer and the applicant arising from the
reimbursement agreement. These might be for reimbursement (issuer v.
applicant) or for breach of the reimbursement contract by wrongful honor
(applicant v. issuer).
3. The statute of limitations, like the rest of the statute, applies only to a letter
of credit issued on or after the effective date and only to transactions, events,
obligations, or duties arising out of or associated with such a letter. If a letter of
credit was issued before the effective date and an obligation on that letter of
credit was breached after the effective date, the complaining party could bring its
suit within the time that would have been permitted prior to the adoption of
Section 5-115 and would not be limited by the terms of Section 5-115.
Official Comment § 5-116.
1. Although it would be possible for the parties to agree otherwise, the law
normally chosen by agreement under subsection (a) and that provided in the
absence of agreement under subsection (b) is the substantive law of a particular
jurisdiction not including the choice of law principles of that jurisdiction. Thus,
two parties, an issuer and an applicant, both located in Oklahoma might choose
the law of New York. Unless they agree otherwise, the section anticipates that
they wish the substantive law of New York to apply to their transaction and they
do not intend that a New York choice of law principle might direct a court to
Oklahoma law. By the same token, the liability of an issuer located in New York
is governed by New York substantive law -- in the absence of agreement -- even
in circumstances in which choice of law principles found in the common law of
New York might direct one to the law of another State. Subsection (b) states the
relevant choice of law principles and it should not be subordinated to some other
choice of law rule. Within the States of the United States renvoi will not be a
problem once every jurisdiction has enacted Section 5-116 because every
jurisdiction will then have the same choice of law rule and in a particular case all
choice of law rules will point to the same substantive law.
Subsection (b) does not state a choice of law rule for the "liability of an
applicant." However, subsection (b) does state a choice of law rule for the
liability of an issuer, nominated person, or adviser, and since some of the issues
in suits by applicants against those persons involve the "liability of an issuer,
nominated person, or adviser," subsection (b) states the choice of law rule for
those issues. Because an issuer may have liability to a confirmer both as an
issuer (Section 5-108(a), Comment 5 to Section 5-108) and as an applicant
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(Section 5-107(a), Comment 1 to Section 5-107, Section 5-108(i)), subsection
(b) may state the choice of law rule for some but not all of the issuer's liability in
a suit by a confirmer.
2. Because the confirmer or other nominated person may choose different law
from that chosen by the issuer or may be located in a different jurisdiction and
fail to choose law, it is possible that a confirmer or nominated person may be
obligated to pay (under their law) but will not be entitled to payment from the
issuer (under its law). Similarly, the rights of an unreimbursed issuer, confirmer,
or nominated person against a beneficiary under Section 5-109, 5-110, or 5-117,
will not necessarily be governed by the same law that applies to the issuer's or
confirmer's obligation upon presentation. Because the UCP and other practice
are incorporated in most international letters of credit, disputes arising from
different legal obligations to honor have not been frequent. Since Section 5-108
incorporates standard practice, these problems should be further minimized -- at
least to the extent that the same practice is and continues to be widely followed.
3. This section does not permit what is now authorized by the nonuniform
Section 5-102(4) in New York. Under the current law in New York a letter of
credit that incorporates the UCP is not governed in any respect by Article 5.
Under revised Section 5-116 letters of credit that incorporate the UCP or similar
practice will still be subject to Article 5 in certain respects. First, incorporation of
the UCP or other practice does not override the nonvariable terms of Article 5.
Second, where there is no conflict between Article 5 and the relevant provision of
the UCP or other practice, both apply. Third, practice provisions incorporated in
a letter of credit will not be effective if they fail to comply with Section 5-103(c).
Assume, for example, that a practice provision purported to free a party from any
liability unless it were "grossly negligent" or that the practice generally limited
the remedies that one party might have against another. Depending upon the
circumstances, that disclaimer or limitation of liability might be ineffective
because of Section 5-103(c).
Even though Article 5 is generally consistent with UCP 500, it is not necessarily
consistent with other rules or with versions of the UCP that may be adopted after
Article 5's revision, or with other practices that may develop. Rules of practice
incorporated in the letter of credit or other undertaking are those in effect when
the letter of credit or other undertaking is issued. Except in the unusual cases
discussed in the immediately preceding paragraph, practice adopted in a letter of
credit will override the rules of Article 5 and the parties to letter of credit
transactions must be familiar with practice (such as future versions of the UCP)
that is explicitly adopted in letters of credit.
4. In several ways Article 5 conflicts with and overrides similar matters governed
by Articles 3 and 4. For example, "draft" is more broadly defined in letter of
credit practice than under Section 3-104. The time allowed for honor and the
required notification of reasons for dishonor are different in letter of credit
practice than in the handling of documentary and other drafts under Articles 3
and 4.
5. Subsection (e) must be read in conjunction with existing law governing
subject matter jurisdiction. If the local law restricts a court to certain subject
matter jurisdiction not including letter of credit disputes, subsection (e) does not
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authorize parties to choose that forum. For example, the parties' agreement
under Section 5-116(e) would not confer jurisdiction on a probate court to decide
a letter of credit case.
If the parties choose a forum under subsection (e) and if -- because of other law
-- that forum will not take jurisdiction, the parties' agreement or undertaking
should then be construed (for the purpose of forum selection) as though it did
not contain a clause choosing a particular forum. That result is necessary to
avoid sentencing the parties to eternal purgatory where neither the chosen State
nor the State which would have jurisdiction but for the clause will take
jurisdiction the former in disregard of the clause and the latter in honor of the
clause.
Official Comment § 5-117.
1. By itself this section does not grant any right of subrogation. It grants only
the right that would exist if the person seeking subrogation "were a secondary
obligor." (The term "secondary obligor" refers to a surety, guarantor, or other
person against whom or whose property an obligee has recourse with respect to
the obligation of a third party. See Restatement of the Law Third, Suretyship § 1
(1995).) If the secondary obligor would not have a right to subrogation in the
circumstances in which one is claimed under this section, none is granted by this
section. In effect, the section does no more than to remove an impediment that
some courts have found to subrogation because they conclude that the issuer's
or other claimanťs rights are "independent" of the underlying obligation. If, for
example, a secondary obligor would not have a subrogation right because its
payment did not fully satisfy the underlying obligation, none would be available
under this section. The section indorses the position of Judge Becker in Tudor
Development Group, Inc. v. United States Fidelity and Guaranty, 968 F.2d 357
(3rd Cir. 1991).
2. To preserve the independence of the letter of credit obligation and to insure
that subrogation not be used as an offensive weapon by an issuer or others, the
admonition in subsection (d) must be carefully observed. Only one who has
completed its performance in a letter of credit transaction can have a right to
subrogation. For example, an issuer may not dishonor and then defend its
dishonor or assert a setoff on the ground that it is subrogated to another
person's rights. Nor may the issuer complain after honor that its subrogation
rights have been impaired by any good faith dealings between the beneficiary
and the applicant or any other person. Assume, for example, that the beneficiary
under a standby letter of credit is a mortgagee. If the mortgagee were obliged to
issue a release of the mortgage upon payment of the underlying debt (by the
issuer under the letter of credit), that release might impair the issuer's rights of
subrogation, but the beneficiary would have no liability to the issuer for having
granted that release.